MARKET INSANITY MAY
26, 2020 by Mike Lathigee:
TAKE PROFITS AND BE CAUTIOUS!
In the last 24 hours American biotech firm Novavax said it had started the first human study of its experimental coronavirus vaccine, with initial results on safety and immune responses expected in July. Vaccine development is a long, complex process, often lasting 10 to 15 years. The market continues to behave as though a vaccine is a foregone conclusion and that good news is imminent – as today the DOW (as I write this @ 10:22AM) is up over 600 points. Year over year Novavax is now up over 700%.
Last week Moderna announced all 45 patients in its vaccine trial had developed antibodies against the coronavirus and the DOW surged 900 plus points. The next day insiders sold over $30 million dollars of their shares (with observers skeptical of the Moderna results) and there is currently a surge in lawsuits against the company. Lots of lawsuits can be paid for when the market cap of your company has increased by billions of dollars in a short period of time!!! It is interesting to note that Moderna is now below the share price before it made its “big” announcement and almost the entire executive team is dumping stock – collecting tens of millions every day.
Both stocks have now risen several hundred percentage points in just a few months creating billions in additional value. I wonder if we will see continued situations of companies rushing through Phase 1 Trials to show any positive results that will see the value of their stock increase by triple digits. Yes, there are many protocols and regulations that must be followed, but as we have seen with Moderna, it was more about getting the news out and worry about complete accuracy later.
There are many professionals with high moral standards in biotech, but the market temptation is big – to skirt the limits, make quick announcement – and see massive gains in wealth. I think we are going to see this situation happen again and again as so many companies are working on a vaccine.
It seems the market feeds on any good news and ignores the trade war with China, the high unemployment rates, the surge in bankruptcies, declining consumer spending, rising foreclosures, possible food supply disruptions etc. This morning I spoke to a landlord, with more than 200 commercial tenants, and less than 40% of them paid rent in May. Brazil coronavirus deaths have skyrocketed and is likely to surpass the US. It goes on and on and etc. etc. etc. The most appropriate song that I can think of right now is “We didn’t Start the Fire” by Billy Joel. Watch the video and listen to the words!
Companies that have no customers like theme parks and hotels are still hanging onto their high valuations and airlines bleeding cash are being propped up. I am expecting a day in the future to hear “kaboom” and the market will wake up.
A day like this makes little sense – with the Nasdaq now trading at all-time highs. Yes, the Fed is buying everything in sight to support the market and is just one short of directly buying stocks. Such a situation is bad for gold, but I believe with Wall Street so ‘out of whack’ – we will see a day of reckoning.
There is not a logical astute investor I know that believes there is value in investing in 25x next year’s earnings. Warren Buffett is totally on the sidelines since March in a much higher cash position and currently has “egg on his face” as investors start to pressure him to jump in because he is missing out. The writing is on the wall when this happens. If you are in the market, take your profits. Maintain a position in gold, silver, a large position in cash and wait for the opportunities that will arise. Believe me there will be great opportunities!!!
I believe we are going to see the market come down hard soon. We are seeing artificial stock market valuations. Think of the devastation when we see the likely resurgence of the virus in the late Fall and Winter. Risk is largely being ignored and all these threats to the economy are unlikely to be overcome. We will see the market spiral down but the only (repeated) caveat is if the Fed continues to feed the market with liquidity – this would keep the party going, at least for the short term.
It appears the old capitalistic metrics where the markets and the economy are in close correlation no longer exist. The market is now driven by algo traders – which is 70% of all trading. The market does not care about my opinion and with these new governing metrics my old school guidance of fundamentals may be viewed as archaic as the current market is only governed by money flows and technical analysis. So, I believe in what I have written but the “new” traders will tell me that my analysis is outdated. Time will tell!!!